Advanced Micro Devices (NASDAQ:AMD) just scored a major strategic win — a new AMD Microsoft partnership focused on developing custom silicon, including chips for the next-generation Xbox console and potentially for AI workloads. This collaboration signals not only renewed strength in AMD’s gaming segment but also deeper integration into the booming AI space.

With AMD stock gaining more than 9% in the last five trading days, many investors are asking: Is this partnership a reason to buy AMD stock now?

Let’s explore what this means for AMD, its long-term potential, and its current valuation.

AMD Microsoft Partnership Aims at AI and Gaming

The newly announced AMD Microsoft partnership brings together two tech powerhouses with a history of working together — most notably on past Xbox consoles. This time, the collaboration is broader, covering custom silicon for gaming, cloud, and AI-based infrastructure.

Microsoft (NASDAQ:MSFT) continues to invest heavily in AI, and working with AMD allows it to diversify away from sole reliance on Nvidia (NASDAQ:NVDA). For AMD, the deal reaffirms its relevance in the highly competitive AI and data center chip landscape.

Gaming hardware demand has cooled recently, but this partnership suggests that both companies believe in a rebound — particularly driven by new hardware cycles and more AI-optimized gaming environments. AMD’s custom silicon capabilities give it an edge in building chips tailored to Microsoft’s specific needs.

AMD Earnings Show Strong AI Momentum

AMD’s recent Q1 2025 earnings beat expectations, showing that the company’s AI and data center segments are driving growth. Revenue surged 36% year-over-year to $7.44 billion, with non-GAAP earnings per share coming in at $0.96 — well above analyst forecasts.

Key highlights include:

• Data Center revenue up 57% YoY to $3.7 billion (strong EPYC and Instinct GPU sales).

• Client revenue up 68% YoY to $2.3 billion (driven by Ryzen processors).

• Gaming revenue down 30% to $647 million (due to lower semi-custom sales).

While gaming struggled, AMD’s AI-driven segments more than compensated, suggesting that the AMD Microsoft partnership could help reinvigorate gaming revenue down the line.

Valuation: Is AMD Stock Still a Buy?

AMD currently trades at a forward P/E of 40.1x and a price-to-sales ratio of 7.99x. These are elevated compared to AMD’s historical averages, but not unreasonable in the context of high-growth AI chipmakers. Its PEG ratio of 1.64x indicates that growth expectations are largely baked in — but sustainable execution will be key.

The market has started to reward AMD’s progress. Although the stock is down 20% over the past 12 months and 40% off its all-time highs, it has rebounded more than 20% in the last three months, reflecting growing investor confidence in its AI roadmap.

Analyst Outlook: Modest Upside with Execution Risk

According to Barchart, AMD holds a “Moderate Buy” rating among 42 analysts. Of these, 28 rate it a “Strong Buy,” with an average price target of $133.32 — about 4% above current levels.

The most bullish analyst sees the stock reaching $200 (56% upside), while the most bearish target is $95 (26% downside). This wide range reflects uncertainty around how well AMD will capitalize on the AMD Microsoft partnership, navigate regulatory challenges, and defend its margins amid rising costs.

Bottom Line: AMD’s Microsoft Deal Could Be a Game-Changer

The AMD Microsoft partnership gives AMD an important foothold in custom chip development for both gaming and AI — two of the most promising long-term growth areas in tech.

If AMD can deliver on its partnership with Microsoft, while continuing to grow its data center and client segments, the stock has room to run. For investors looking to gain exposure to AI and chip innovation beyond Nvidia, AMD may be worth a closer look.

With solid earnings, strong partnerships, and increasing relevance in AI, AMD stock could be an underappreciated gem in 2025.

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